investment appraisal


Also found in: Medical.

investment appraisal

The process of evaluating the desirability of INVESTMENT proposals covering such things as the replacement of worn-out plant and machinery, the establishment of a new factory, the takeover of another company, new product development or a sales promotion campaign.

Generally the desirability of an investment will be considered in terms of the PROFIT it will yield and managers will prefer those investments which promise the largest profit. Alternatively, they could measure the CASH FLOW associated with a project, and award priority to projects which promise the best contribution towards future cash flows. In making investment decisions managers will undertake investments which promise a rate of return greater than the cost of capital needed to finance it.

There are several techniques which can be used to assess investment opportunities, some based upon accounting profit measures, others upon cash flows. These methods include the ACCOUNTING RETURN, PAYBACK PERIOD and DISCOUNTED CASH FLOW.

investment appraisal

the process of evaluating the desirability of INVESTMENT proposals covering such things as the replacement of worn-out plant and machinery, the establishment of a new factory, the takeover of another company, new product development, a sales promotion campaign, a new road or hospital.

Generally, the desirability of a private sector investment will be considered in terms of the PROFIT it might yield, and managers will prefer those investments that promise the largest profit. Alternatively, managers could estimate the CASH FLOWS associated with a project and award priority to projects that promise the best contribution towards future cash flows. There are several techniques that can be used to assess investment opportunities in terms of cash flow, including the PAYBACK PERIOD method and the DISCOUNTED CASH FLOW METHOD. Public sector investment projects can also be assessed in terms of their cash flows, although for such projects the broader SOCIAL COSTS, such as any POLLUTION caused, need to be considered as well as private costs borne by the government (see COST-BENEFIT ANALYSIS).

In making investment decisions, managers will undertake an investment that promises a rate of return greater than the COST OF CAPITAL that is needed to finance it. This involves estimating the cash outflows and inflows associated with an investment and allowing for the different timing of these flows by converting them into their equivalent present values, using an appropriate DISCOUNT RATE.

All investment projects are concerned with future costs/cash flows and future revenues/cash inflows and thus there is inevitably some uncertainty about whether cash flows will turn out to be as estimated at the time a project is assessed (see RISK AND UNCERTAINTY).

Full browser ?